Flutter Entertainment Stock Undervalued After Gaming Stocks Stumble

Posted on: December 6, 2021, 12:38h. 

Last updated on: December 6, 2021, 06:17h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

There’s been an acute weakness in gaming equities in recent weeks, including those with significant sports wagering exposure. As a result, names such as Flutter Entertainment (OTC:PDYPY) are undervalued in the eyes of some market observers.

Flutter stock
Bettors take in the action at a FanDuel sportsbook. An analyst says parent company Flutter is undervalued. (Image: Forbes)

In a note to clients today, Peel Hunt analyst Ivor Jones reiterates a “buy” rating on the FanDuel parent while trimming his price target to $192 from $225. That new forecast implies a valuation of 15x earnings rather than 20x. Jones adds Flutter stock is now undervalued.

Flutter has remarkably successful businesses in the US, and we expect them to continue to thrive,” he said. “Valuations in the US are changing and tough questions are being asked about when profit will be achieved and what multiples to apply.”

Like its peers in the US, FanDuel isn’t yet profitable here on a broader basis. It’s spending large amounts of cash to acquire customers, but the operator is quickly able to wring dividends from clients. Since the 2018 Supreme Court ruling on the Professional and Amateur Sports Protection Act (PASPA), FanDuel’s cost per acquisition (CPA) is $291. But its average return on investment in the first year after acquiring a customer is 1.2x, according to Flutter.

Flutter owns 95 percent of FanDuel, the largest online sports betting operator in the US.

Flutter Stock Has Perks

As is the case with rivals such as DraftKings, FanDuel currently isn’t profitable and it spends considerable sums of cash on marketing and customer acquisition.

In the first half of the year, FanDuel spent $404 million on marketing and sales to generate $952 million in revenue. That’s while rival DraftKings spent $399 million to drum up sales of $610 million. Flutter projects FanDuel will be positive on the basis of earnings before interest, taxes, depreciation and amortization (EBITDA) sometime in 2023.

However, FanDuel doesn’t represent the entirety of the Flutter empire, and that’s a positive for investors relative to US-only operators. One of the primary sources of allure with UK-based betting firms, such as Flutter, isn’t their consumer-facing businesses, but rather back-end technology.

Flutter, which also owns Paddy Power and PokerStars, controls some of the most recognizable brands in mature betting markets such as Australia and Europe. That’s while many of its US competitors have no international exposure.

2022 Catalysts for Flutter

Looking toward 2022, the major potential catalyst on the horizon for Flutter stock is the expected spin-off of FanDuel.

That process was delayed this year due to an executive departure and some legal wranglings with Fox Corp. (NASDAQ:FOXA). With sports wagering equities encountering weakness in the home stretch of 2021, Flutter may be validated in delaying the FanDuel separation.

Another obvious catalyst for Flutter would be a takeover — something that’s been previously speculated. But that’s just a rumor at this point, and the company doesn’t need to put itself up for sale.